If you or your business own residential property in Canada, you may be subject to the new federal Underused Housing Tax (UHT).
This new, annual 1-per-cent tax was announced in the 2021 federal budget and came into effect on Jan. 1, 2022. It’s one of several measures that governments at all levels have introduced in recent years with the broad aim of addressing housing supply and affordability by targeting housing that is considered vacant or underused.
Many owners of residential property have raised questions about whether this federal tax applies to them, and whether they are required to pay or simply file a return to meet their obligations by the April 30 deadline – and avoid penalties. The following provides some clarity.
Underused Housing Tax: The basics
The UHT affects some owners of certain types of residential real estate in Canada. Generally, if you’re not a Canadian citizen or permanent resident (a “non-Canadian”) and you own residential property in Canada, you must file an annual UHT return. You’ll then either quality for an exemption or be subject to the tax.
Here’s the good news: The majority of Canadian homeowners won’t be affected by the UHT.
However, some individuals and most private Canadian companies are required to file a return for specific types of residential property they own, even if they’re not liable to pay the tax. Even in those cases, the penalties for failing to file with the CRA can be steep.
The UHT reporting requirements cast a very wide net. The rules appear to apply to a number of circumstances that may not have been anticipated.
Specifically, the UHT applies to residential properties such as detached or semi-detached houses, rowhouses and condominiums. In the case of standalone homes, the UHT does not apply if the building contains more than three self-contained dwelling units, meaning each unit has a private kitchen, bathroom and living area. High-rise apartment buildings and quadruplexes also don’t fall under the UHT rules.
Most Canadian homeowners are excluded, but check the details
Any non-Canadian owners (including businesses incorporated outside Canada) of residential property are likely to be considered an “affected owner.” As such, they must submit a UHT return for each property owned on December 31 of the calendar year, regardless of whether they’re subject to the tax.
Some Canadians and most private companies, as well as members of trusts and partnerships, may also fall into the affected owner category and will need to meet the April 30 deadline. Similar to non-Canadians, they must file a UHT return for each residential property owned, although they may ultimately not be liable to pay the tax.
Reporting requirements cast a wide net
It’s important to emphasize that the UHT reporting requirements cast a very wide net. The rules appear to apply to a number of circumstances that may not have been anticipated. This includes, for example, real estate developers holding housing inventory for sale or residential apartment building owners where legal title to each suite in the building is separately registered.
Owners exempt from filing include registered charities, housing co-ops, educational institutions, Indigenous governing bodies and corporations, as well as people who own residential properties in their capacity as trustees of a mutual fund trust, a real estate investment trust (REIT) or specified investment flow-through (SIFT) trust.
Ownership for the UHT is based on who is registered on title to the property, rather than beneficial ownership (meaning who benefits from ownership of the property).
Be aware of penalties for late filing
Your tax professional can provide more information about ownership and use of residential properties in Canada, according to the UHT rules. Traditionally, these types of information-reporting initiatives carry heavy penalties for not filing and late filing. This is the case with the UHT.
This year, to provide more time for affected owners, the government is providing transitional relief. The application of penalties and interest for the 2022 calendar year will be waived for any late-filed UHT return and for any late tax payment, provided the return is filed or the UHT is paid by Oct. 31, 2023.
The deadline for filing the return and paying the tax is still April 30, 2023, but no penalties or interest will be applied for returns and payments that the CRA receives before Nov. 1, 2023.
Investigate grey areas, such as vacation properties
Vacation properties and cottages owned by Canadian citizens and permanent residents are generally excluded from UHT and carry no reporting requirements. Those owned by non-Canadians and used for at least 28 days in the tax year by family members may gain an exemption from the tax, but will likely still need to file a UHT return.
As a rule of thumb, affected owners with any newly acquired properties, properties under construction or renovation, or properties used by family members for a portion of the year should take a closer look to determine whether an exemption from the tax is available.
Other taxes on housing
Some cities and provinces have also imposed housing taxes that apply to vacant properties or, more broadly, aim to address housing needs.
Vancouver currently has an Empty Homes Tax, Toronto has a Vacant Home Tax, and Ottawa has its Vacant Unit Tax. British Columbia also administers a Speculation and Vacancy Tax, and Ontario has a Non-Resident Speculation Tax. Owners of residential real estate in Canada might be looking at more rules and requirements down the road.
Part of a broader concern for housing
The UHT is part of a broader federal initiative to address Canada’s housing shortage and help Canadians access and buy homes in Canada.
For one, last year’s federal budget introduced the Tax-Free Home Savings Account to help Canadians save for their first home. The budget also included major investments geared toward new housing construction, as well as tax credits on multigenerational home renovations that benefit aging parents and family members living with a disability.
Other measures aim to reduce pressures on the country’s residential housing market. One is a two-year ban on the purchase of residential property by foreign investors, starting January 1 of this year. Another is an “anti-flipping” rule, which designates as business profits any sale of residential real estate that is not held for 12 months.
Alongside the UHT, the federal government’s goal with these initiatives is for Canadians to get the most out of existing and newly constructed residential properties.
If you have questions about the UHT or any of the new housing measures that could affect you, your family or your business, be sure to contact a tax professional.
Dino Infanti is National Leader, Enterprise Tax, and Lorne Shillinger is National Tax Leader, Family Office, both for KPMG LLP in Canada.
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